The Enforcement of Competition Law: Recent Developments and Lessons from Economic Theory
Prof. Yannis S. Katsoulacos Athens University of Economics and Business NGA for DGCOMP and HCC Presentation at Analytical Center , Moscow May 2014 This research has been co-financed by the European Union (European Social Fund – ESF) and Greek national funds through the Operational Program “Education and Lifelong Learning” of the National Strategic Reference Framework (NSRF) – Research Funding Program: ARISTEIA –CoLEG
Enforcement of Competition Policy and Law • Competition policy has become a prominent policy in all developed economies and many developing ones, from Brazil to India. Indeed, the available evidence suggests that in countries where law enforcement institutions are sufficiently effective, a well designed and enforced competition policy can significantly improve total and labor productivity growth. • The private enforcement of competition policy can give rise to large distortions: it is easy for firms to use strategically the possibility to sue under the provision of competition law to protect their market from competitors rather than to protect competition. Wellknown example: Digital Equipment Corp. vs. Intel Corp case.
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Enforcement of Competition Law
In the reminder of this presentation concentrate on public enforcement. Rationale: privately beneficial actions / conduct of agents may create harm to others by reducing competition. But: a poor public enforcement of Competition Law by publicly funded competition authorities can also end up worsening market distortions rather than curing them.
Examine three dimensions of enforcement I. Assessment procedures or legal standards: Per-Se Rules Vs. Effects Based (or discriminating / economics-based – Rule-of-Reason) procedures. II. Substantive Standards: Consumer Surplus Vs. Total Welfare Standards. III. Policies on Sanctions.
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I. Choice of Legal Standards
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I. Legal standards:
Per-se Vs. Effects-Based Rules • Per Se Rules: An entire class of actions is allowed (disallowed) depending on whether their average harm is deemed to be negative (positive). • Effects-Based Rules / Approach: Actions are allowed (disallowed) if some estimate of their individual harm is negative (positive). • According to the Decision Theoretic Approach the legal standard should minimize the cost of decision errors – false convictions (Type I errors) and false acquittals (Type II errors). 5
I. Legal standards:
Per-se Vs. Effects-Based Rules • More general welfare framework was provided in Katsoulacos, Y. and Ulph, D. (2009), On optimal legal standards for competition policy: A general welfarebased analysis, The Journal of Industrial Economics, Volume LVII, pp. 410-437. • The paper takes into account decision errors and, also: - indirect/deterrence effects (prevent actions ever being taken), plus - procedural effects (coverage rate, delays in reaching decision, level and structure of penalties). - Ignores, due to their obvious effect in choice of standard, administrative costs.
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I. Legal standards:
Per-se Vs. Effects-Based Rules: Decision Errors • Paper provides an explicit test for when an effects-based approach is sufficiently good to enable the Authority to reduce decision errors (effectively discriminate) relative to Per Se Rules. • The test shows that the quality of the analysis/models available to the Authority under effects-based must be greater than the strength of the presumption of legality for a presumptively legal action (or strength of presumption of illegality for a presumptively illegal action). • The strength of presumption of legality (illegality) depends on the frequency of benign (harmful) actions and the size of economic benefit (harm)). E.g. under presumptive illegality:
pH (1− γ )(−hB ) q = > = s PI 1− pB γ hH PI
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I. Legal standards:
Per-se Vs. Effects-Based Rules: Deterrence • The choice of the legal standard is also influenced by its indirect/deterrence effects. Effects-Based Rules generate relative to Per Se Rules: - Absolute deterrence effects that are too weak (too strong) when the action is presumptively illegal (legal). - Differential deterrence effect whereby harmful actions are more heavily deterred than benign actions.
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I. Legal standards:
Per-se Vs. Effects-Based Rules Two more factors that affect or are affected by the choice of legal standard: - Legal Uncertainty (LU): inability of an agent to assess with certainty whether or not an action that it wishes to pursue is legal (and so would be permitted were it to be detected and investigated by an independent authority or court) or it is illegal (and so it would be disallowed) – early literature on Law and Economics important. - Penalties: Legal experts have stressed that the use of Effects-Based procedures should be associated with a reduction in the levels of fines imposed (legal principal of nulla poena sine lege certa). However, the reverse is being observed.
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I. Legal standards and Legal Uncertainty: Per-se Vs. Effects-Based Rules
• Argument: effects-based rules induce Legal Uncertainty and thus should be less attractive than Per Se Rules. • However according to recent work (Katsoulacos and Ulph, 2013, 2014 – both available in www.cresse.info ) there is no monotonic link between LU and welfare. More precisely: • Paper distinguishes among three types of Legal Uncertainty: - No Legal Uncertainty: Firms know the estimate of harm that the Competition Authority will make to assess their action. - Partial Legal Uncertainty: Firms know the true harm but not the estimate of the harm by the Competition Authority. - Complete Legal Uncertainty: Firms do not know the true harm nor the estimate of the harm by the Competition Authority. 10
I. Legal standards and Legal Uncertainty: Per-se Vs. Effects-Based Rules
Katsoulacos and Ulph (2013) show that: •Effects-Based procedures generate variability of treatment but not necessarily uncertainty of treatment. In this case, provided the Effects-Based rules reduces decision error costs, welfare is higher than under Per Se. •When Effects-Based procedures generate legal uncertainty they may still be superior to Per Se because of the superior deterrence effects that the uncertainty generates. •Indeed under some circumstances having some degree of legal uncertainty (partial legal uncertainty) may be welfare superior to having no legal uncertainty.
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I. Legal standards and Legal Uncertainty: Per-se Vs. Effects-Based Rules
• Paper also allows penalties to be chosen by the CAs and to vary depending on the legal standard in force and the information structure. Then there is a clear welfare ranking of enforcement procedures. With endogenous penalties: • Effects-based procedure with partial LU is superior to Effects-based procedure with no LU which is superior to effects-based procedure with Complete LU which is superior to Per se rules. • Thus, with endogenous penalties Per Se Rules are unambiguously worse than an Effects-Based procedure whatever the degree of LU.
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I. Legal standards and Legal Uncertainty:
Per-se Vs.under Effects-Based Rules • Further, an Effects-Based approach when there is
Partial LU the penalty will be higher than when there is no LU and when we use Per Se Rules. (Reason: with LU the likelihood of action to be disallowed is reduced and to compensate for this, CA will want to increase deterrence by increasing the penalty). • However, if the average welfare if all firms take the action is positive, with Complete LU the CA will want to set a zero penalty to avoid deterrence - consistent with the principal nulla poena sine lega certa. • If average welfare if all firms take the action is negative then CA will want to have deterrence and it will set an even higher penalty under Complete LU than under Partial LU.
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I. Legal standards:
Legal Errors vs. Legal Uncertainty • Katsoulacos and Ulph (2014) also provide a framework for distinguishing between and examining the effects of legal errors vs. legal uncertainty. • Though the latter can be influenced by the former, the former are neither necessary nor sufficient for the existence of legal uncertainty. It is shown that an increase in legal errors will always reduce welfare. However, for any given level of legal errors, information structures involving more legal uncertainty can improve welfare. This holds always, even when there is complete legal uncertainty, when sanctions on socially harmful actions are set at their optimal level. This transforms radically one’s perception about the “costs” of legal uncertainty:
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Figure: Costs of LU W
W PLU E ( )
W FB W PLU E ( 0)
W
NLU
W NLU E ( )
(E ) 0
W CLU E ( 0)
W CLU E ( ) E
0
E0
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II. Substantive Standards
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II. Substantive Standards: Basic Question… What is the proper standard an Antitrust Authority (the agent) should use in order to appraise firms’ practices given that we (principals) would like to maximize social welfare? •Long debate with recent resurgence concerning optimal substantive standard. Consumer Surplus Standard Vs Total Welfare Standard. •Besanko and Spulber, 1993; Neven and Roeller, 2000; Lyons, 2002; Padilla, 2005; Carlton, 2007; Farell and Katz, 2006; Heyer, 2006; Fridolsson, 2007; Pittman, 2007; Salop, 2010; Armstrong and Vickers, 2010; Kaplow, 2011, Lianos, 2013; Blair and Sokol, 2013. 17
II. Substantive Standards: Williamson’s trade off (1968)
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II. Substantive Standards
Consumer Surplus Standard (CSS) Vs. Total Welfare Standard (TWS)
We can find evidence of the use of a CSS by: a. statements of the use of the CSS “The Commission will focus on those types of conduct that are most harmful to consumers” (par. 5 Guidance on Art. 102 of EC Treaty)
b. the way Competition Authorities (CAs) treat injury to competitors Both in EU and in US the plaintiff must prove injury to competition – generally interpreted as referring to consumer harm - and it is not sufficient to show injury to competitors. Under a total welfare standard, substantial harm to competitors could lead to liability (Salop, 2010). 19
II. Substantive Standards
Consumer Surplus Standard (CSS) Vs. Total Welfare Standard (TWS)
c. Treatment of efficiencies In EU •Art. 101 of EC Treaty exception in par. 3 the provisions may be declared inapplicable“(if the agreement) contributes to improving the production or distribution of goods or to promoting technical or economic progress while allowing consumers a fair share of the resulting benefit” •Par. 49 of the EC Guidelines “fair share” means that they are at least compensated for the restrictive effects.
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II. Substantive Standards
Consumer Surplus Standard (CSS) Vs. Total Welfare Standard (TWS)
c. Treatment of efficiencies In US • Merger Guidelines in US “… the Agencies consider whether cognizable efficiencies likely would be sufficient to reverse the merger’s potential to harm customers in the relevant market, e.g. by preventing price increases in that market”.
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II. Substantive Standards
Consumer Surplus Standard (CSS) Vs. Total Welfare Standard (TWS)
• Antitrust Legislation in Canada Section 96 of the Canadian Competition Act directs the Tribunal not to issue an order of a merger if “..(it) is likely to bring gains in efficiency that will be greater than and will offset, the effects of any prevention or lessening of competition that will result or is likely to result from the merger”.
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II. Substantive Standards
Consumer Surplus Standard (CSS) Vs. Total Welfare Standard (TWS)
• Antitrust Legislation in Australia
Section 90.9 of the Competition Consumer Act 2010 in Australia it is stated that an authorization may be granted if it “…would result, or be likely to result, in such a benefit to the public that the acquisition should be allowed to take place”. 23
3. Substantive Standards: Basic Arguments 1. Distributional Considerations 2. Investments in R&D 3. Interaction between firms and CAs 24
II. Substantive Standards
Consumer Surplus Standard (CSS) Vs. Total Welfare Standard (TWS)
A. DISTRIBUTIONAL CONSIDERATIONS / ISSUES •
CONSUMER SURPLUS STANDARD The Consumer Surplus Standard reflects better the societies judgment of a fair distribution of wealth
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TOTAL WELFARE STANDARD The paramount criterion for the assessment of anticompetitive practice should be overall economic efficiency
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II. Substantive Standards – Distributional Issues Consumer Surplus Standard (CSS) Vs. Total Welfare Standard (TWS)
CONSUMER SURPLUS STANDARD
The Consumer Surplus Standard is used to avoid the redistribution of wealth away from consumers (Salop 2010)
PARETO OPTIMAL CRITERION
TOTAL WEFARE STANDARD
Wealth transfers (even potential) between different members of the society should be treated as welfare neutral
KALDOR-HICKS CRITERION
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II. Substantive Standards– Distributional Issues
Consumer Surplus Standard (CSS) Vs. Total Welfare Standard (TWS)
• Appropriate division of policies?
Efficiency oriented Policies
Antitrust Policy
Policies for the distribution of wealth
Taxes and Transfers
Antitrust Policy (Indirectly) 27
II. Substantive Standards – Distributional Issues Consumer Surplus Standard (CSS) Vs. Total Welfare Standard (TWS)
Poor Targeting from indirect redistribution Consumers are heterogeneous. Rich and poor consumers are differently affected by antitrust decisions.
Firms are owned by shareholders. Shareholders could be wealthy individuals or family groups and individuals close to the average. Higher rents may result in gains for labor and management, not only profits. Most transactions in modern economies are between firms → → Intermediate products.
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II. Substantive Standards -– Distributional Issues Consumer Surplus Standard (CSS) Vs. Total Welfare Standard (TWS)
• Intermediate products “We are aware of no evidence that the wealth distribution varies systematically according to firm’s place in the value chain” (Farrell and Katz; 2006)
• While this is true, if the demand of the final product is inelastic and pass-through is very high then it would be appropriate to treat transfers to sellers from purchasers of intermediate goods “as indirect, but real, transfers to (the) sellers….from the final consumers of the goods that embody these intermediate goods” (Pittman, 2007).
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II. Substantive Standards – Distributional Issues Consumer Surplus Standard (CSS) Vs. Total Welfare Standard (TWS)
• Intermediate products & buying cartels “First, if only consumers matter, then a buying cartel should be perfectly legal and indeed should be encouraged” (Carlton; 2007) • While Salop (2010) and others treat this as an exception there are proponents of the Consumer Surplus standard that have argued that the use of this standard do not imply generally tolerance to monopsony power (Pittman, 2007) - as when the buying cartel is formed by intermediate firms that also have market power as sellers. If, in turn, the buying cartel is formed by final customers, but sellers have also market power, even the total welfare standard will not unambiguously be condemning.
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II. Substantive Standards – Distributional Issues Consumer Surplus Standard (CSS) Vs. Total Welfare Standard (TWS)
• Low efficiency from indirect redistribution Taxes and Transfers are better suited for the redistribution of wealth. The tax and transfer system creates incentives to reduce labor effort but so does indirect redistribution through antitrust policy. Moreover, to enhance redistribution through antitrust we need to deviate from the maximization of total welfare and adopt policies under which the increase in consumer surplus is less than the decrease in producer surplus → inefficiency.
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II. Substantive Standards – Distributional Issues Consumer Surplus Standard (CSS) Vs. Total Welfare Standard (TWS)
• Despite the above arguments it remains inevitably true that taking into account the producers’ surplus favors the wealthier part of the society and not the part with average and low incomes relative to the distribution of consumers surplus (Kaplow, 2011). • Taxes and transfers, although more efficient redistribution policies, are set by institutions that have no expertise in evaluating anticompetitive harm in order to compensate the loss to consumers (Salop, 2010).
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II. Substantive Standards – Investments in R&D Consumer Surplus Standard (CSS) Vs. Total Welfare Standard (TWS)
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A (short-run) Total Welfare Standard is more likely to maximize long-run consumer surplus than a (short-run) Consumer Surplus Standard
Antitrust Authorities focus on a small period of time (<2 years) and do not consider fixed cost savings under CSS
High fixed cost savings
Incentives to invest in R&D
Product cycle is usually > 2 years Improved product quality
Lower marginal cost New varieties
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II. Substantive Standards – Investments in R&D Consumer Surplus Standard (CSS) Vs. Total Welfare Standard (TWS)
• Those arguing in favor of a Consumer Surplus Standard state that the existence of dynamic markets does not justify the use of a Total Welfare Standard. •
Innovation
diffusion
Price Competition
Increased product quality
Diffusion is neither instantaneous nor complete (especially in markets with barriers to entry) and this is the reason why firm invest in R&D in the first place (Salop; 2010). 34
II. Substantive Standards –
Interaction between firms
and CAs Consumer Surplus Standard (CSS) Vs. Total Welfare Standard (TWS) Diffusion is neither instantaneous nor complete
•The choice of the welfare standard affects the practices proposed and undertaken by the firms since different actions will be treated differently. This interaction between firms and CAs creates a different issue in the context of the above debate. That is, accepting that the ultimate goal of antitrust policies is the maximization of total welfare, which is the appropriate standard to fulfill this goal? •An important theoretical concept behind this question is the concept of strategic delegation.
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II. Substantive Standards: Strategic delegation
Related literature â&#x20AC;˘Besanko and Spulber ;1993. The adoption of a standard that gives strictly greater weight to consumer surplus can counterbalance the asymmetric information problems between Authorities and firms regarding efficiencies and move equilibrium closer to the first best solution. â&#x20AC;˘Neven and Roller; 2000. Under a standard with a consumer surplus bias the Authorities become tougher and less sensitive to perks / lobbying. 36
II. Substantive Standards – Interaction between firms and CAs (TWS)
Consumer Surplus Standard (CSS) Vs. Total Welfare Standard
• Lyons (2002) examined firms choosing among mutually exclusive mergers and showed that under certain circumstances social welfare might be higher if the competition authorities use a CSS instead of a TWS. • Intuition: The TWS consists of a threshold rule. Under a TWS firms will pick the most profitable merger as long as it does not lower TW. But there might be merger opportunities that increase TW. Under certain circumstances the CSS will deter firms from choosing the most profitable action and induce them to take the action that is better from a total welfare point of view. • Other related recent work: Farrell & Katz (2006), Fridolfsson (2007), Armstrong & Vickers (2010), Nocke & Whinston (2011). Also:
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II. Substantive Standards – Interaction between firms and CAs Consumer Surplus Standard (CSS) Vs. Total Welfare Standard (TWS)
• Paper by Katsoulacos, Metsiou and Ulph (2014) – available in www.cresse.info. • This, generalizes the analysis of Lyons to anticompetitive actions of any type (e.g. tying and bundling, rebates, exclusive contracts etc) • If there is just a single action that firms can take, then welfare is higher under a TWS than under a CSS. • If there exists a set of mutually exclusive actions that firms can take then there will exist environments for which a CSS will generate higher welfare than a TWS (Lyons Effect). This depends on the distribution of firms across these different environments. • However, there will always be some other environments for which welfare is higher when a TWS is used, because the CSS may deter firms from taking any action even though there are welfareenhancing actions that could have been chosen.
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II. Substantive Standards – Interaction between firms and CAs Consumer Surplus Standard (CSS) Vs. Total Welfare Standard (TWS)
Some other results: •If the efficiencies are sufficiently large in favor of the action with the higher price-cost margin, then a TWS welfare dominates a CSS. •The greater the efficiencies in favor of the action with the lower price-cost margin, then the less likely the Lyons effect to exist, and it may disappear altogether if the reduction in cost of the lower price-cost margin action is much greater than the reduction in cost of the higher price-cost margin action.
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II. Substantive Standards – Interaction between firms and CAs Consumer Surplus Standard (CSS) Vs. Total Welfare Standard (TWS)
• Given the same efficiencies across mutually exclusive actions with different price-cost margins a higher initial market power implies that the Lyons’ effect will hold over a greater range of environments. • Given the initial market power of the firm as the efficiencies of the practices increase the range of the environments for which the Lyons’ effect holds increases. • Given the efficiencies of the actions and the initial market power of the firms as the difference between the price-cost margin of the mutually exclusive actions increases the range of environments over which the Lyons effect holds increases.
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III. Policies on Sanctions
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III. Policies on sanctions â&#x20AC;˘ A very important tool for the effective enforcement of Competition Law is the sanctions imposed on violators by regulators and courts. Recent literature shows a number of distortions that current monetary fine / penalty policies are likely to generate. â&#x20AC;˘ Also it emphasizes the importance of non-monetary, criminal and other type of sanctions. â&#x20AC;˘ Source of distortions: in contrast to what the literature on optimal fines suggests, antitrust rules or the practice of CAs in most jurisdictions base fines on affected commerce rather than on unlawful profits. 42
III. Policies on Sanctions • Becker (1968): optimal penalties should be set in order to deter inefficient offences. • However, assuming a CS standard and actions that are always harmful in the sense that they reduce CS, such as cartels, in order to obtain efficient deterrence, fines should be based on an estimate of (collusive) profits. • In contradiction, current fining policies typically base fines on affected commerce, i.e. on revenue in the relevant market, and they often impose caps to max. applicable fines in terms of % of overall turnover. • Bageri, V., Katsoulacos, Y. and Spagnolo, G. (Econ. J., 2013). “The Distortive Effects of Antitrust Fines Based on Revenue” discuss three distortions produced by current policies.
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III. Policies on Sanctions
Distortive effects of monetary fines • Distortion 1: When total turnover is used either as a base for the fine or for a cap, the more diversified firms expect higher fines than firms that have a narrow focus on their core business, for whom affected revenue in the relevant market is not very different from total revenue. • Distortion 2: A fining rule proportional to affected commerce – i.e. to total revenue in the relevant market distorts the price-setting incentives of the cartels that it does not deter, inducing them to optimally increase the cartel’s price above the monopoly level (in the absence of fines). • Distortion 3: Firms forming cartels at the end of a long value chain , with a low profit/revenue ratio, expect larger fines relative to collusive profits than firms that have a larger profit/revenues ratio.
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III. Policies on Sanctions Distortive effects of fines
Analysis of Distortion 2 â&#x20AC;˘The cartel price overcharge with fines on revenues is higher than the normal monopoly overcharge when fines are on profits or firms ignored fines or if there were no fines. â&#x20AC;˘The cartel price overcharge with fines on revenue is increasing in the probability of successful enforcement and in the percentage of revenue fined. â&#x20AC;˘The magnitude of the price distortion due to fines on revenue (relative to normal monopoly price) is independent of the elasticity of demand and is increasing in the probability of successful enforcement and in the percentage of revenue fined.
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III. Policies on Sanctions Distortive effects of fines
Analysis of Distortion 2 â&#x20AC;˘The larger the duration of the cartel (the time that lapses between cartel formation and when the cartel is banned), the larger the distortion generated by a policy of fines based on revenue. Analysis of Distortion 3 â&#x20AC;˘Larger fines relative to collusive profits are imposed on industries with lower profit/revenue ratio or on industries with higher cost/revenue ratio. â&#x20AC;˘On the other hand, Beckerian fines or fines as a fraction of profits, that do not distort price decisions, would lead to a fine/profit ratio that is equal for both industries.
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III. Policies on Sanctions
Distortive effects of fines Discussion: •Enforcement costs often justify the use of simple rules of thumbs. BUT: •Basing fines on a firm’s affected commerce and basing fine caps on the firm’s total revenue is likely to create large distortions. •Our empirically-based simulations suggest that the deadweight losses produced by these distortions can be large. •Developments in economics and econometrics make it possible to estimate illegal profits with reasonable precision or confidence. •It is probably time to change these rules of thumb that make revenue so central for calculating fines.
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III. Policies on Sanctions Another important (more practical) question: •Would tougher penalty regimes - by which we mean not just the level of the penalty but also the anticipated probability of successful anti-trust enforcement - result in lower cartel overcharges? •Evidence by Bulotova and Conor (2005, 2006) •Katsoulacos and Ulph (Econ. J., 2013) provide a theoretical framework for thinking about the link between the “toughness of the penalty regime” and the observed level of cartel overcharge. They show that this link is far from straightforward and may indeed go in the opposite direction to that expected.
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III. Policies on Sanctions â&#x20AC;˘ Result 1: If the fine is proportional to profit the toughness of the penalty regime does not affect the cartel overcharge, while if it is proportional to revenue, a tougher penalty regime will result in a higher cartel price/overcharge. â&#x20AC;˘ Result 2: If the penalty is imposed on revenue then, if firms anticipate that the probability of effective enforcement is greater the higher is the price they charge, this will cause them to charge a lower price than they would have done if the probability of effective enforcement is unaffected by the price overcharge. 49
III. Policies on Sanctions â&#x20AC;˘ Result 3: If fines are levied on profits and if firms anticipate that the probability of effective enforcement is higher the greater is the price they charge, then the cartel pushes price below (output above) the monopoly level that would normally be set when the probability of effective enforcement is independent of the price overcharge. Moreover, the higher the penalty the lower the price. â&#x20AC;˘ K&U (E.J., 2013) also investigate the implications of changes in the penalty regime parameters for the average price overcharge taking into account the effect of the changes in the penalty regime on deterrence â&#x20AC;&#x201C; i.e. on the number of cartels actually formed. 50
III. Policies on Sanctions â&#x20AC;˘ Result 4: With endogenous deterrence, an increase in the toughness of the antitrust regime in the form of an increase in the revenue penalty rate will lead to an increase in the average price overcharge, since now fewer cartels form, and those that do form come on average from less competitive environments. This positive indirect deterrence effect reinforces whatever direct effects the tougher penalty regime might have on the cartel overcharge â&#x20AC;&#x201C; Result 1.
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III. Policies on Sanctions • Result 5: An increase in the toughening of the penalty regime, that arises by raising the rate at which a fixed penalty component falls with cartel output, will unambiguously cause the average observed cartel overcharge to fall. Further, there is an indirect effect of inducing more cartels to form from, on average, more competitive environments. • So: while there is one dimension of the penalty regime – the extent to which any fixed penalty is related to the price overcharge set by the cartel – where a toughening of the regime unambiguously results in a lower cartel overcharge, for many other dimensions it remains the case that a tougher regime increases the overcharge.
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III. Policies on Sanctions â&#x20AC;˘ The question of which penalty regime is best in terms of its effects on the average price overcharge and welfare is examined much more generally in a recent paper by Katsoulacos, Motchenkova and Ulph (2014). â&#x20AC;˘ Specifically they develop a framework that: - Is based on a dynamic oligopoly model - Compares four penalty regimes: fixed penalties and penalties based on revenue, profit and the overcharge - Takes into account in examining optimal prices and deterrence the cartel sustainability conditions - Examines the deterrence implications of each of the four penalty regimes - Derives the effects on welfare and not just on the price overcharge.
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III. Policies on Sanctions â&#x20AC;˘ For formed cartels, penalties based on the overcharge produce lower prices than any of the other regimes. But depending on the form of revenue equivalence one uses, overcharge-based penalties may have weaker deterrence effects. â&#x20AC;˘ Nevertheless in a very wide range of plausible cases (including all those suggested by the parameter values that we find in practice) the overall performance of overcharge-based penalties is better than under the other regimes. Moreover under the theoretically correct equivalence criterion under which penalty rates are chosen to reflect each regimeâ&#x20AC;&#x2122;s impact on prices, overcharge based penalties are unambiguously better than any alternative.
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III. Policies on Sanctions: Criminal and other sanctions
â&#x20AC;˘ It seems clear that monetary fines alone are not adequate to achieve the required level of deterrence. The problem is that not always can wrongdoers be fined at a sufficient level since they may not have sufficient wealth, or may conceal it; transfer fines to other parties (uninformed shareholders, directorsâ&#x20AC;&#x2122; insurance funds, etc.); or be protected by limited liability (for corporate fines). â&#x20AC;˘ In two recent articles in Competition Policy International Ginsburgh and Wright (2010) and Joe Harrington (2010) (comment on the former) discuss in detail the usefulness of criminal sanctions in inducing more deterrence.
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III. Policies on Sanctions: Criminal and other sanctions • Ginsburg and Wright emphasize debarment rather than monetary fines and imprisonment while Harrington suggests that criminal sanctions and monetary fines should be considered as complementary and the introduction (or increase) of criminal sanctions should not lead to a reduction in monetary fines. • According to his viewpoint, when adding debarment to existing monetary fines and imprisonment is concerned, then “more is better” if the objective is to deter collusion. 56
Thank you!! (ysk@hol.gr)
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